Budget is defined as "the proposed action plan in quantitative expression by management for a specified timeframe, with purpose of coordinating what they need to do to implement that plans" (Hongren et al, 2006 p.181). And Blumentritt (2006, p.73), defines budgeting as a process of which an organization in allocating the financial resources to its units.
Organizations use budgetary targets for various benefits, just to state a few here, as for purpose of performance evaluation, forecasting the future, helping in profit maximization etc. Some survey studies reviewed that budgeting is considered to be commonly used accounting tool for planning and control in organizations (Uyar, 2009).
In Malaysia, Sulaiman et al (2002) has conducted a survey on 61 companies in consumer and industrial products sectors of the Kuala Lumpur Stock Exchange's (KLSE) main board. Results show that, 98% of the survey respondents used budgets. Another survey by Joshi et al (2003) on 146 non listed and listed companies in Bahrain shows that all companies used operating budgets. In Singapore, 97 percent from 109 companies surveyed also reported the use of budgets (Gosh and Chan, 1996).
However, there are on-going discussions and arguments on the usefulness of traditional budgeting. Some organizations stated that it should be continually utilized and some have considering abandon it or move into new budgeting model like better budgeting and Beyond Budgeting (BB) approaches (Hope and Fraser, 2000; De Waal, 2005; Player, 2003; Neely et al, 2003; Libby and Lindsay, 2007).
Early in 1998, the Consortium for Advanced Manufacturing-International (CAM-I), has worked out Beyond Budgeting Round Table (BBRT), as an alternative to traditional budgeting, due to traditional budgeting is considered as "unnecessary evil" (Wallander, 1999).
The consortium has conducted research at some member organizations and the BBRT has developed a 12 principle model, which has been worked out in the "ideal" BB organizations. The 12 BB principles will be discussed in details later.
In a nutshell, the purpose of this assignment is to provide an in depth review of both traditional budgeting and new budgeting approaches being adopted by organizations, including its benefits and limitations. BB model has encouraged some organizations to break free from their annual performance trap, but there are some surveys support the use of budget, regardless of its limitations.
Quite a number of management accounting and finance journals have been reviewed and summarized. The key findings and conclusions emerged fromAdmin2011-02-22T22:34:00
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it are set out in the below tabulation.
3.0Summary on article review
Paper Title
Author (s)
Journal Name
Focus of Paper
Key Findings/ Conclusions
Beyond Budgeting in Practice
Bishop, J.
Chartered Accountants Journal, December 2004, p. 29
This paper discussed on 2 organizations in New Zealand i.e. Telecom and Electronic & Telecommunications Industry Training Organization (ETITO), abandoned BB in favor for better and flexible management approach.
ETITO have found benefits in BB model:
Greater ownership
More committed to whole organization's needs
Flexibility in plan changing as needs change
Whereas Telecom feedback on more times needed to find out the benefits out of the newer approach & make it meaningfulAdmin2010-12-20T23:28:00
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Paper Title
Author (s)
Journal Name
Focus of Paper
Key Findings/ Conclusions
Why Some Organizations Go "Beyond Budgeting"
Player, S.
Journal of Corporate Accounting & Finance, March/April 2003, pp. 3-9
This academic paper mentioned on some organizations tried to get rid from traditional budgeting through various approaches. A more radical approach has taken up by Rhodia & Svenska Handelsbanken, in goal setting & performance measurement.
An adaptive performance management process is based on a relative performance, not on fixed targets. Under radical decentralized approach, leaders developed a performance and reward climate based on competitive success at every level, not to mention on the empowerment given to the leader to act within their boundaries. Using & integrating both systems in an organization may be beneficial in abandoning the traditional budgeting model, yet this will still lead to higher profitability & sustainabilityAdmin2011-02-22T11:30:00
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Paper Title
Author (s)
Journal Name
Focus of Paper
Key Findings/ Conclusions
Better Budgeting or Beyond Budgeting?
Neely, A., Bourne, M. & Adams, C.
Measuring Business Excellence, 7 (3) 2003, pp. 22-28
This paper reviewed the literature and researched on 15 leading companies in United Kingdom via interview, as to gather insights of actual approaches adopted. Generally, they tend to fall into 3 principal techniques i.e. rolling forecasts, information technology approach & radical re-engineering (BB approach).
5 principle approaches under better budgeting were discussed, but none of the techniques provides a complete solution, till BB is uncovered. "5+1" critical success factors were identified under radical re-engineering. However, based on the research, very few companies, apart those Scandinavian pioneers, have gone into BB, though the inherent weaknesses remain in traditional budgetingAdmin2011-02-22T11:30:00
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Paper Title
Author (s)
Journal Name
Focus of Paper
Key Findings/ Conclusions
Beyond Budgeting or Better Budgeting?
Libby, T. & Lindsay, R.M.
Strategic Finance, 89 (2) August 2007, pp. 46-51
This paper argued on Hope and Fraser's approach, by conducting a survey on 212 IMA members in North America, as to capture their views of budgeting and reasoned out why organizations still require budget.
There are many valid criticisms on budgets & some organizations can't operate without budgets. However, some organizations chose to improve and carry on the budgeting process, instead of going BB. Further to that, the budgets are fundamentally flawed are probably overstated, as some organizations still use budgets for control purpose. Johnson & Johnson and Emerson Electric examples show that, if traditional budgeting and BB approaches are designed appropriately, it can be highly effectively regardless of any conditionAdmin2011-01-31T16:20:00
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Paper Title
Author (s)
Journal Name
Focus of Paper
Key Findings/ Conclusions
Beyond Budgeting or Budgeting Reconsidered? A Survey of North-American Budgeting Practice
Libby, T. & Lindsay, R.M.
Management Accounting Research 21, 2010, pp. 56-75
This research paper collected data via web-based survey from medium to large sized organizations in Canada and USA, as to update on the North American budgeting literature, besides to collect empirical evidence to assess the criticisms by Horngren et al (2004) and Hope and Fraser (2003).
Most organizations continue to use budgets for control purpose and found it to be value added. Traditional budgeting not likely to be eliminated, instead many are planning to improve their budgeting process to overcome the criticisms. We should not take either one focus, as in the case of Svenska Handelsbanken (BB) or Johnson & Johnson (traditional budgeting). Instead, common factors across both models are worth for further research i.e. a decentralized management style, information sharing culture, subjective evaluation and interactive control approachAdmin2011-02-22T11:32:00
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Paper Title
Author (s)
Journal Name
Focus of Paper
Key Findings/ Conclusions
Beyond Budgeting
Hope, J. & Fraser, R.
Strategic Management, October 2000, pp. 30-35
This paper has brought up a BB model, as to compete effectively in this new economic era.
This paper said Svenska Handelsbanken has deviated from annual budget since 1972 and how they strived to improve their performance at local and regional levels, besides beating its competitors.
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BB model consists of 2 main elements:
Devolved organization
Adaptive performance management
This dual approach was adopted more than 25 years ago by Svenska Handelsbanken, made the company successful operated and led to right direction.
By overcoming the compliance and control approach under traditional budgeting, a business model can be operated at higher speed.
Paper Title
Author (s)
Journal Name
Focus of Paper
Key Findings/ Conclusions
Insights from Practice, Is Your Organization Ready for Beyond Budgeting?
De Waal, A. A.
Measuring Business Excellence, 9 (2) 2005, pp. 56-67
This research paper examined some literature on BB and described the beyond budgeting entry scan (BBES), in which Cleaning Industries Netherlands B.V. (CIN) use this to assess if BB is workable for them.
The BB deserves serious considerations in view of its flexible structure and adaptive process. Research shows that the more BB principles an organization implements, the better it performs (Fraser and de Waal, 2001). Besides, BBES gives good indication to an organization of its dissatisfaction level of current budgeting & whether the organization will change, eliminate or leave the process the way it is.
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Paper Title
Author (s)
Journal Name
Focus of Paper
Key Findings/ Conclusions
An Evaluation of Budgeting Approaches: Traditional Budgeting, Better Budgeting and Beyond Budgeting
Uyar, A.
Journal of Academic Studies, 11 (42) August 2009, pp. 113-130
This academic paper detailed out the different types of budgeting approaches and its limitations faced on adopting traditional & better budgeting approach. It listed out some of organizations that have successfully moved into BB practices.
Organizations need more sophisticated management tools in this fast moving environment and budgeting is found to be one of most important planning and control tool for organizations. However, organizations is either revising the budgeting process to make it more reflective to the occurring changes, or abandoning it & going BBAdmin2010-12-20T23:31:00
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Paper Title
Author (s)
Journal Name
Focus of Paper
Key Findings/ Conclusions
Management Accounting Practices in Selected Asian Countries
Sulaiman, M., Ahmad, N.N.N. & Alwi, N.
Managerial Auditing Journal,19 (4) 2004, pp. 493-508
This literature review examined the extent both traditional and contemporary management accounting tools (refer to traditional budgeting) being used in four Asian countries i.e. Malaysia, China, India & Singapore.
Survey results shown that the use of contemporary management accounting tools (refer to balance scorecards) is lacking in four countries. The use of traditional budgeting remains high in Malaysia, Singapore and India, except in China. Being moved towards a competitive business environment, the usefulness of China's capitalist style accounting methods is worth for further researchAdmin2011-02-22T11:34:00
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Paper Title
Author (s)
Journal Name
Focus of Paper
Key Findings/ Conclusions
Budgeting Practices in the Turkish Hospitality Industry: An Exploratory Survey in the Antalya Region
Uyar, A. & Bilgin, N.
International Journal of Hospitality Management, 2010, pp. 1-11
This research paper conducted questionnaire surveys on 79 Turkish hotels in the Antalya region, as to explore the budgeting practices adopted.
The findings from the survey are as below:
Budget committee and budget manual is common in use
Participative approach is valued in budget planning
Budget is revised and periodic reporting within the budget period (flexible budgets)
Profitability and cost concern are main reason for budget preparation
Viewed budget as primary performance indicator
Budget gamesmanship viewed as an issueAdmin2011-02-22T11:34:00
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Literature review
4.1 Traditional budgeting approach
Traditional budgeting method has emerged in the 1920s & has been used as a management accounting tool in planning and control. Results shown from a management accounting practices survey conducted in India (2001) that, the absorption rate for budget related practices was more than 90% among 46 practices (Uyar, A., 2009). The budget is used notably by organizations in:
day to day operations planning
cash flow & financial position planning
cost controlling
performance evaluation
coordinating activities among business units
Libby & Lindsay (2003) stated that the traditional budgeting operates in "top down" or centralized hierarchy model, in which the decisions flow down from top management (CEO, CFO etc) to the front line managers/ staff. It uses fixed targets from the top management and determines the future actions of managers. As a result, many organizations criticized that budgeting process is:
time consuming
quickly become out dated
costly
counterproductive
encourage gaming and dysfunctional behavior
inflexible and unresponsive to today's competitive climate
reinforce "command and control" culture
as barrier to change
(Uyar, A., 2009; Neely, A. et al., 2003; Libby, T. & Lindsay, R. M., 2007)
To an extent, the budgeting tends to create a short term culture that focus on budget figures achieving, rather than on implementing business strategy. Ultimately, the budgeting leads to business underperformanceAdmin2011-02-22T18:12:00
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"Fixed" approach
"Centralized" hierarchical structure
"Centralized" hierarchical structure
Figure 1: Traditional budgeting model (Source: www.bbrt.org)
4.2 Better budgeting approach
The traditional budgeting model is too rigid for today's competitive and fast changing environment. The academicians and practitioners improved the traditional budgeting and an alternative approach called "better budgeting" is emerged. Neely et al (2003, pg.23) has worked out five principle better budgeting techniques, namely:
Activity based budgeting
It is similar to Activity based costing (ABC), in which planning and controlling is involved along the value adding processes. Improved in budget outputs accuracy, yet more work than traditional budgeting
Zero base budgeting
Start from scratch during each budgeting cycle, do not base on previous year record. Tends to be more work involved
Value based budgeting
Is a formal and systematic technique, in which evaluating expenditure plans as project appraisal. It is too theoretical and cumbersome to adopt this approach.
Profit planning
"Profit wheel" approach for planning future financial cash flow. It is another theoretical model.
Rolling budgets and forecasts
More responsive to changing environment & provides more accurate forecasts, as 12 month budget tends to be re-forecasted quarterly. Despite this appear to be most regular better budgeting approach, yet tends to incur additional workload & thus higher costsAdmin2011-01-08T20:46:00
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4.3 Beyond budgeting approach
Though the better budgeting models attempt to change the budgeting process, but the traditional budgeting aspect still remain strong in performance management in most organization today.
This leads to some organizations has taken a radical re-engineering approach i.e. BB and abandoned budgeting altogether. This BB approach promotes an adaptive management process and decentralized (devolved) structure, in which it comprises 12 principles (Hope and Fraser, 2003; de Waal et al., 2004):Admin2011-02-22T17:25:00
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Adaptive Process
Goals
Set targets relative to competition and rolling to medium term benchmarks, not fixed contracts
Rewards
Base rewards on relative performance, not fixed targets
Planning
Base planning on continuous, bottom up process, not top down annual event
Controls
Base controls on relative key performance indicators, not variances against plan
Resources
Make resources available as required, not through annual budget allocation
Anticipatory management
Use anticipatory system for managing system, not for making short term correctionsAdmin2011-01-31T16:28:00
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Devolved Process
Leadership
Treat everyone as their customers by coaching, not on hierarchical relationships
Structure
Create a lean network and processes, not centralized functions and departments
Autonomy
Give people freedom and capability to act, do not control them
Responsibility
Give responsibility to every level for competitive results, not for meeting budgets
Coordination
Provide open information network for cross company interaction, do not restrict it hierarchically
Governance
Action base on clear values and boundaries, not mission statement and plansAdmin2011-01-17T18:42:00
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BB has benefited the organizations with:
faster response time to customers
greater innovation due to performance judgment as a team
lower costs due to higher awareness on the costs being used
improved customer and supplier loyalty
increased staff performance and motivation
These promote an increase in ownership, thus providing a more ethical reporting system and allow bigger adaptability to changing environments. As a result, these lead to higher profitability & sustained competitive success.Admin2011-02-22T17:45:00
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"Adaptive" approach
"Devolved" structure
Figure 2: Beyond Budgeting Model (Source: www.bbrt.org)
4.4 Traditional budgeting versus beyond budgeting model
Several organizations have moved to BB and equivalently shown better management performance. For example, Park Nicollet Health Services has practiced a six quarter financial forecast, called a rolling forecast. They continuously improve the financial performance and the cost per unit performance, but not looking at the deficiencies in their budgets. They measure their units' performance by key performance indicators (KPIs) e.g. profits, cost ratios, cash flows etc, which giving them more time spent on developing action plan to support them.
Svenska Handelsbanken, the largest bank in Sweden abandoned its traditional budgeting in the 1970s. They had shown better return on equity than its benchmarked direct competitors. It has lowest cost/income ratio among all 30 universal banks in Europe. Another example is a Denmark- based company, Borealis A/S uses rolling forecast to manage the future and balance scorecard to monitor staff performance. Forecasting is carried out on a quarterly basis to a rolling five quarters with a minimal resource. Over the last five years, balance scorecard has been broadly used within Borealis A/S. External benchmarks against the competitors have been applied, as to prevent internal negotiation and controlling fixed costs indirectly.
Not only the Scandinavian companies, two organizations from New Zealand i.e. Telecom and Electronics and Telecommunications Industry Training Organization (ETITO) consider trying out BB approach in search for better reporting (Bishop, J., 2004). Admin2011-02-22T20:54:00
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Having to know BB approach has its own usefulness, there are several empirical surveys conducted on the opinion about traditional budgeting adopted in their organizations. From a total of 212 Institute of Management Accountants (IMA) members surveyed in 2005, 50% agreed or strongly agreed that budgets are indispensable and companies couldn't operate without them (Libby, T. & Lindsay, R.M., 2007). Based on 558 Canadian and US survey samples, about 90% respondents graded 70 out of 100, indicated they obtained a good value from budgeting system, even after considering the time and cost of budgeting, which BB literature has reported. 94% out of 440 samples indicated that they had no plan to eliminate the budgets for control purpose in near future (Libby, T. & Lindsay, R.M., 2010).
So far, Johnson-Johnson has worked extensively on budgeting system in an extremely unpredictable business world and constantly ranked as one of the best managed companies in Fortune's annual survey.
However, from the survey results, the respondents have also criticized what BB model has reported was not true. Though traditional budgeting is known as dependency model and most organizations use it for performance evaluation purpose. Yet only 15% of survey shown that companies compares actual performance rigidly to pre-set targets as for managers' performance evaluation. Approximately 68% out of 236 Canadian respondents indicated that the amount of manager time spent in budget preparation was about 3 - 4 weeks. This is significantly less than what been reported by Hope and Fraser (2003) i.e. 12 - 20 weeks of manager's time.Admin2011-02-22T23:06:00
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5.0 Conclusion
Based on the above findings, we believe that there is no absolute right or wrong of adopting traditional budgeting or BB approach in their organization. Most researchers commented that having a traditional one-year budget may be viewed as outdated due to its fixed annual target approach, and may not able to reflect a frequently fluctuating business environment, which with budget revision may make it more reflective. Yet, not many companies are ready for BB though, especially if a company is part of a larger organization or conglomerate, which they may still rely on pre-set financial targets.
Therefore, before any organization starts to implement BB, it is advisable to take part in Beyond Budgeting Entry Scan (BBES), This BBES provide a good indication like any dissatisfaction on current budgeting, whether a company is willing to change, abolish or leave it as the way it is.
Regardless traditional budgeting or BB, if in- depth understanding on the application underlying in each model is developed, both can be highly effective, though the latter should deserve serious consideration in future, because it brings a different view on budgeting process and organizational structure. As what Fraser and de Waal (2001) mentioned, the more BB principles an organization implements, the better it performs. Moreover, with the existence of BBRT, it provides shared learning, expertise advices, diagnostic tools etc for its company members in the principles and implementationAdmin2011-02-22T23:07:00
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